Where an employee had been dismissed on the ground of medical incapacity while his contractual entitlement to long-term disability benefits was ongoing, it was appropriate to imply a term into his employment contract to restrict the employer’s contractual power to dismiss.

Where an employer operates a scheme providing long-term sickness or incapacity benefits (e.g. a PHI scheme), the courts may imply a term preventing an employee being dismissed where this would deprive them of the benefits to which they would be otherwise entitled under such a scheme (see 1996 case of Aspden v Webbs Poultry and Meat Group (Holdings) Ltd).

Background

Mr Awan worked for American Airlines (AA) in the security department. He was contractually entitled to both sick pay and the benefit of an insured long-term disability benefit plan (as a result of AA’s group income protection policy). Any benefits he was entitled to under the plan would terminate if his employment ceased.

In 2012 Mr Awan took sick leave because of depression. Shortly after, AA outsourced the security department to ICTS and AA’s obligations under the plan transferred under TUPE. His absence continued, and he received payments under the plan until November 2014. As it did not prove possible to agree adjustments which may have enabled his return to work, he was dismissed in November 2014 after ICTS concluded that he was permanently incapable of doing his job (he had been off sick for over two years). At the time of his dismissal, Mr Awan was in receipt of long-term disability payments (although there had been some negotiations with the relevant insurers, given the TUPE transfer, and the employer was funding some of the payments). Mr Awan brought tribunal claims, arguing that it was unfair and discriminatory (arising from his disability) to dismiss him whilst he was still entitled to long-term disability payments.

The tribunal found that there was nothing to stop ICTS dismissing him while he was entitled to receive benefits under the insured long-term disability plan. There was no scope for implying a term (along the Aspden lines) because it would have contradicted an express contractual power of dismissal. ICTS acted reasonably and the dismissal was fair. Also, the dismissal was a proportionate means of achieving a legitimate aim so that there was no unlawful disability discrimination. Mr Awan appealed.

EAT decision

The EAT allowed Mr Awan’s appeal.

It was contrary to the purpose of the disability plan for ICTS to be entitled to exercise its contractual power to dismiss Mr Awan and deny him the benefits the plan was envisaged to provide. A term therefore could be implied into his contract restricting the employer’s right to dismiss him on the grounds of his continuing incapacity when he was receiving benefits under the plan. Such an implied term operated to limit (rather than contradict) the express contractual power to terminate on notice by preventing the exercise of that right where it would frustrate the entitlement to long-term benefits expressly provided for by the contract.

The whole purpose of the long-term disability benefit scheme would be defeated, said the EAT, if Mr Awan’s employer could end entitlement under the scheme by dismissing him when he became unfit for work.

As the tribunal had wrongly concluded that a term should not be implied into the contract, its finding on the fairness of the dismissal and the discrimination claim could not stand and the matter was remitted to the tribunal for reconsideration.

This case is in keeping with a number of other cases, such as Aspden, where the courts have held that an employer’s power to terminate an employee’s contract is restricted if termination would deprive the employee of certain rights/benefits conferred under a long-term disability plan (e.g. PHI). This makes sense given that the whole purpose of having a PHI or long-term ill health scheme is to provide income for the employee until retirement or return to work and that purpose would be defeated if the employer simply terminated the employment for incapacity once the employee became entitled to receive the benefits of the scheme. If an employer wants to retain a right to dismiss for ‘incapacity’, as a starting point it would need to ensure that the contract made this clear, and even then that might not be enough (as in the Aspden case).

In most cases, the employer will not be at a grave disadvantage because the benefits (normally two-thirds of salary) received by the employee will be paid by the insurance company.

However, this case acts as a stark reminder to HR or those thinking of dismissing an employee for ‘incapacity’ to first check whether the employee has the benefit of any insured long-term ill health scheme, and if so, to reconsider any decision to dismiss. Otherwise, the employer may find itself at the receiving end of a very expensive unfair dismissal and/or disability discrimination claim.